The Transfer Problem with Supply Effects: Presumption for Terms of Trade Changes

Abstract

With variable labour supply, a transfer's price responses depend on intercountry differences in propensities to consume commodities and leisure, as well as output effects of labour supply changes. The paper reveals a critical link between the transfer's terms of trade effect and the forces that shape trade patterns; namely, differences in consumer preferences, quality and quantity of factor supplies, and production technologies. When trade is based on differences in preferences for either commodity consumption or work, there is strong The transfer problem deals with the impact of reparation and foreign aid payments on the terms of trade and overall welfare of transfer-paying and transfer-receiving countries. The issue attracted strong interest after the First World War, with Keynes (1929) arguing that Germany's direct burden from reparation payments was exac- erbated by the indirect burden from its declining terms of trade. The view that a transfer worsens the transferor's terms of trade later became known as the orthodox